Nigeria – Fixed Income Weekly # 1

The week that was (July 17-21) – Yields curve rises on softening system liquidity

  • Despite net OMO bill issuances, NTB yields soften: Despite sustained liquidity tightening as the CBN issued NGN275bn worth of OMO bills to take out NGN97bn in maturities, benchmark Nigerian Treasury Bill (NTB) yields declined: 91-day ( down 510bps), 182-day (down 100bps) and 364-day (down 20bps) to 14.49%, 19.7% and 22.3% respectively.  The 91-day move reflects a temporary mispricing but the downward pattern elsewhere likely stemmed from declining yields at the primary auction, which continued to fall: 91-day (-12bps to 13.89%), 182-day (-12bps to 19.05%) and 364-day paper (-8bps to 22.76%). Markets continue to avoid the shorted dated tenors due to widening disparity relative to secondary trading with auction losers likely buying up the shortest maturity.
  • Bonds trend north: At the long end of the NGN yield curve, bonds continued the up-move from last week driven by sell-offs across the 3-year (where yields climbed 15bps), 7-year(up 15bps) and 20-year (up 6-7bps). The rising trend contrasts with fundamental picture of declining inflation and muted bond issuance since April 2017. Though fiscal revenue positions remain soft, the lack of expression in desperate actions at bond auctions implies markets implies markets could be pricing higher borrowings ahead. Given the higher oil production picture now relative to Q2 17, my theory is that the market disconnect stems from reduced demand for paper PFAs appear to have largely deployed their FGN 2017 maturities is driving upward movement in bond yields.

In summary, I think lower yields at the primary auction appeared to have weighed on secondary market yields liquidity while subdued liquidity at the long end (as PFAs appear to have largely deployed their FGN 2017 maturities) of the yield curve contrived in pushing yields higher over the course of last week

The week ahead (July 24-28) – No surprises: MPC to remain static. Beware the modest improvement in liquidity

  • In the week ahead, there are no NTB or bond auctions but there is a NGN20bn bond maturity (FGN 2017) on Thursday and NGN65bn OMO maturity today. In terms of events, the CBN commences its two-day monetary policy club meet with markets generally expecting no change.
  • Hawkish MPC to remain: Unlike the US Federal Reserve, the CBN seems poor with forward guidance and the nuances of communication with the governor already crowing about no rate cut over the weekend. Markets seem unsurprised and I think we will see MPC members remain inert for a number of reasons. First, while inflation, which has been the whipping boy of CBN excuses has declined, it remains well above its upper threshold of 9%. Though inflation has declined largely on base effects, the MPC is likely to claim credit which would reinforce holding the status quo. Secondly, while the NGN has appreciated across all segments from the last meeting, this has owed much to CBN’s hand-holding of the interbank and liquidity tightening activity. To relax now would raise the risk of watching those gains evaporate. Thirdly, while the apex bank has lowered rates on OMO activity, which create the outside chance of a slight cut, the bank continues to wage war on system liquidity with the daily auctions. Although credit growth has tailed CBN forecasts, the bank is likely to see improving PMI numbers as evidence of its current stance, so why change? On this basis, I see a HOLD on all policy parameters for the July 2017 MPC.

Markets will likely watch out for clues in CBN post MPC commentary about prospects of monetary easing. Across SSA, rates are moving down after South African Reserve Bank (SARB) responded to softening growth and inflation by embarking on a surprise rate cut. Ghana’s central bank has been on an easing cycle and the downside to inflation following last week’s tamer than expected reading could stoke dovish inclinations. Given the relatively poor forward guidance record of the CBN, this might be a tough one to follow. I would advise investors are better off watching what happens at the weekly OMO auctions to better gauge where rates are likely going to evolve to. So long as the apex bank continues to wage war on liquidity then any talk of easing is moot.

Bond yields could slow down on the maturities ahead of Thursday but I expect them to resume the northward journey shortly afterwards given the small size of the maturity relative to April.

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